How US-China Trade Tensions Impact Taiwan’s Economy
9 April 2025 · Uncategorized ·
Source: · https://finance.technews.tw/2025/04/09/ten-major-industries/
Today, DBS released its "Economic Outlook for the Second Quarter of 2025," during which senior economist Marty Tyrone stated that reciprocal tariffs imposed by President Donald Trump carry a 45% risk of stagflation in America and a 35% chance of an economic recession. This scenario could reduce GDP growth by approximately two percentage points between 2025 and 2026.
Tyrone noted that the announced tariff rate on Taiwan—an unexpectedly high 32%—exceeds both the average tariff rates among Asia’s eleven major economies (around 28%) and the global average of sixty countries affected by these tariffs. Given its significant reliance on exports to America, Taiwan faces substantial negative impacts from this policy.
In 2024, Taiwanese exports accounted for roughly 23% of total exports and approximately 14% of nominal GDP; among Asia's major economies, only Vietnam demonstrated greater export dependency on the US market. This tariff policy is likely to cause a significant contraction in trade volume. Taiwan’s overall export value represented about 63% of its nominal GDP that year—ranking fifth amongst Asian economic entities.
Tyrone explained that due to the nature of Taiwan's outward-oriented economy, it will likely experience indirect impacts from reciprocal tariffs as US inflationary pressures rise alongside tariff rates. While President Trump may implement domestic tax cuts in an attempt to mitigate these effects, such measures require time to take effect.
Regarding affected industries, Tyrone pointed out that the technology sector might be relatively less impacted because DBS estimates Taiwan’s top ten products imported into America account for 79% of total imports from Taiwan in 2024. Substitutes are limited; computer components and telecommunications equipment primarily come from Mexico with lower tariffs than those imposed on Taiwanese goods.
Tyrone's analysis indicates that AI servers also fall under this category, representing $32.7 billion worth of exports to America by Taiwan in 2024. Other parts are sourced mainly from China and Vietnam where tariff rates may be even higher; therefore, Taiwanese manufacturers retain some pricing power allowing for cost transfer.
Tyrone believes semiconductor products remain temporarily exempted as they function primarily as intermediate goods. They will likely face only indirect impacts if end-user devices are affected by these measures. Non-tech sectors like industrial machinery and equipment have a broader range of supplier options including Mexico, South Korea, Japan, Canada, and Germany.
Taiwan has room for fiscal policy expansion due to its relatively low debt-to-GDP ratio (around 30%), providing flexibility in supporting industries affected by tariffs through increased government spending. This could help bolster the labor market and domestic demand while stimulating private consumption.
Companies may adjust their supply chain strategies, with firms currently operating production facilities in lower-tariff countries like Mexico or Malaysia potentially expanding capacity as a short-term measure. In the long run, large enterprises are likely to increase investments within America to avoid tariffs; however, smaller businesses might find high American operational costs prohibitive and seek diversification into European markets, Japan, China, and ASEAN.
DBS forecasts Taiwan’s GDP growth for 2025 at 3% and in 2026 at 2.4%, both facing significant downward risks. Assuming a price elasticity of around 0.5, the reciprocal tariffs could reduce Taiwanese exports to America by approximately 16%, potentially leading to a decrease in GDP growth between two percentage points over these years.
Tyrone emphasized that if global economic growth declines due to tariff impacts by one percent point, Taiwan’s GDP would likely experience a similar drop. However, trade negotiations and countercyclical stimulus measures could help mitigate potential losses for both Taiwan's economy and the world at large. Strong performance in Taiwanese exports and manufacturing PMI during Q1 2025 reflected pre-emptive cargo shipments ahead of tariffs taking effect.
Given that US importers initially find it difficult to quickly locate substitutes due to low trade elasticity, Taiwan’s export resilience is expected to persist into the second quarter. A slowdown might occur mid-year as alternative products emerge with increased trade flexibility; however, subsequent effects from an economic downturn or recession in America and globally could negatively affect Taiwan's economy towards late 2025 through early 2026.
(Lead image source: TechNews)
Tyrone noted that the announced tariff rate on Taiwan—an unexpectedly high 32%—exceeds both the average tariff rates among Asia’s eleven major economies (around 28%) and the global average of sixty countries affected by these tariffs. Given its significant reliance on exports to America, Taiwan faces substantial negative impacts from this policy.
In 2024, Taiwanese exports accounted for roughly 23% of total exports and approximately 14% of nominal GDP; among Asia's major economies, only Vietnam demonstrated greater export dependency on the US market. This tariff policy is likely to cause a significant contraction in trade volume. Taiwan’s overall export value represented about 63% of its nominal GDP that year—ranking fifth amongst Asian economic entities.
Tyrone explained that due to the nature of Taiwan's outward-oriented economy, it will likely experience indirect impacts from reciprocal tariffs as US inflationary pressures rise alongside tariff rates. While President Trump may implement domestic tax cuts in an attempt to mitigate these effects, such measures require time to take effect.
Regarding affected industries, Tyrone pointed out that the technology sector might be relatively less impacted because DBS estimates Taiwan’s top ten products imported into America account for 79% of total imports from Taiwan in 2024. Substitutes are limited; computer components and telecommunications equipment primarily come from Mexico with lower tariffs than those imposed on Taiwanese goods.
Tyrone's analysis indicates that AI servers also fall under this category, representing $32.7 billion worth of exports to America by Taiwan in 2024. Other parts are sourced mainly from China and Vietnam where tariff rates may be even higher; therefore, Taiwanese manufacturers retain some pricing power allowing for cost transfer.
Tyrone believes semiconductor products remain temporarily exempted as they function primarily as intermediate goods. They will likely face only indirect impacts if end-user devices are affected by these measures. Non-tech sectors like industrial machinery and equipment have a broader range of supplier options including Mexico, South Korea, Japan, Canada, and Germany.
Taiwan has room for fiscal policy expansion due to its relatively low debt-to-GDP ratio (around 30%), providing flexibility in supporting industries affected by tariffs through increased government spending. This could help bolster the labor market and domestic demand while stimulating private consumption.
Companies may adjust their supply chain strategies, with firms currently operating production facilities in lower-tariff countries like Mexico or Malaysia potentially expanding capacity as a short-term measure. In the long run, large enterprises are likely to increase investments within America to avoid tariffs; however, smaller businesses might find high American operational costs prohibitive and seek diversification into European markets, Japan, China, and ASEAN.
DBS forecasts Taiwan’s GDP growth for 2025 at 3% and in 2026 at 2.4%, both facing significant downward risks. Assuming a price elasticity of around 0.5, the reciprocal tariffs could reduce Taiwanese exports to America by approximately 16%, potentially leading to a decrease in GDP growth between two percentage points over these years.
Tyrone emphasized that if global economic growth declines due to tariff impacts by one percent point, Taiwan’s GDP would likely experience a similar drop. However, trade negotiations and countercyclical stimulus measures could help mitigate potential losses for both Taiwan's economy and the world at large. Strong performance in Taiwanese exports and manufacturing PMI during Q1 2025 reflected pre-emptive cargo shipments ahead of tariffs taking effect.
Given that US importers initially find it difficult to quickly locate substitutes due to low trade elasticity, Taiwan’s export resilience is expected to persist into the second quarter. A slowdown might occur mid-year as alternative products emerge with increased trade flexibility; however, subsequent effects from an economic downturn or recession in America and globally could negatively affect Taiwan's economy towards late 2025 through early 2026.
(Lead image source: TechNews)